Update on February 3rd Announcement

March 23, 2010

As a follow-up to my announcement on February 3rd that I would be cutting back on my blogging activities here in order to focus on the writing of an article for submission to economics journals, I wanted to let you know that I’ve finished that effort and recently submitted an article to a respected economics journal. 

Only time will tell if this effort will bear fruit.  Though the vast majority of the articles that appear in these journals are written by academic economists, they do accept articles from beyond the academic community and the process of review of submissions is completely “blind.”  The title page, containing information about the author, is submitted separately and the main document is devoid of anything that identifies the author.  (This is a requirement of the submission process.)  I’m told that the process of review can take several months.  In the meantime, I’m not able to post a copy of the article because the journal had to be granted the copyright.  I won’t divulge the title of the article or the journal to which it was submitted in order to help protect my anonymity from reviewers who may do some googling in an effort to identify the source. 

If rejected by this particular journal, I will then be free to submit it to another. 

The article contained some of the same data presented in my book, but some new research as well that further bolsters the case for the relationship between population density and per capita consumption. 

A lot of additional work may be required, since I understand that it’s common for reviewers to suggest improvements to an article before publication.   But, for now, the lion’s share of the work is done and I’m back to posting and commenting on a more frequent basis.


Immigration “Reform” a Dead Issue

March 22, 2010


Talk about bad timing.  Thousands of immigration “reform” activists gathered on the Washington mall on the very day that health care reform legislation faced a final vote.  If you blinked, you may have missed any reporting of this event altogether.  The issue has been pushed so far out of Americans’ consciousness that, only hours after this rally took place, I actually had to do a search on Reuters in order to find an article.  (See above link.)  It had already been pushed aside, not just by health care, but by squabbles over aid for Greece, corporate mergers, Tiger Woods and other trivia. 

The problems faced by advocates of immigration “reform” (a euphemism for amnesty for illegals) are the same that they faced when George Bush tackled the issue.  First of all, the vast majority of Americans oppose amnesty.  The vast majority see illegal immigration as a drain on our social safety net resources.  And the vast majority favor putting a halt to illegal immigration and deporting illegal immigrants. 

George Bush quickly found that any attempt to placate the Hispanic voting bloc with amnesty legislation had absolutely zero chance of success without first assuring legislators that border security and the problem of illegal immigrants stealing jobs from Americans had been addressed.  So, to their chagrin, reform activists soon found that their efforts had back-fired when Bush implemented a border crack-down, reinforcing the border patrol with National Guardsmen and building more fence, while simultaneously ratcheting up workplace enforcement with big, high-profile raids that netted thousands of illegal workers. 

Regardless of whether you agree with Obama’s positions, you can’t argue that he isn’t willing – even anxious – to tackle monumental issues.  Immigration reform isn’t one of them.  Being so far down on the priority list, behind the economy, global warming, energy policy and two major wars, its likelihood of ever being tackled by this administration is remote.  The president virtually said as much in his State of the Union address in January. 

But, if it does come up, Obama will face the same problem that Bush encountered, and may very well respond in the same way – by concluding that the path forward first requires a crack-down on illegal immigration.  Until the day arrives when the issue of immigration is seen in the bigger context of the need to stabilize our population, this may be the best that those of us opposed to blindly throwing fuel on the fire of the consequences of overpopulation can hope for.

China Blinks

March 19, 2010


As reported in the above-linked article, China has softened its stance on the yuan exchange rate dispute and will send an envoy to Washington to try to defuse the issue. 

I’m not surprised.  Since the U.S. is the one with the huge trade deficit, we have absolutely nothing to lose by taking action to restore a balance of trade, and China has no effective means of retaliation.  Like a mugger who stands over his victim, wielding a knife, China now finds themselves powerless when the U.S. draws a 9 mm. 

The threat of the dumping of U.S. treasury holdings in retaliation for a move to label them a “currency manipulator” – a threat never made by China but merely feared by trade policy hand-wringers – was never a real threat.  Between other nations and the Federal Reserve, China’s treasury holdings could easily be absorbed.  On the other hand, the threat to China’s economy from the loss of its U.S. exports is real and serious.  It could collapse their economy. 

The U.S. has the upper hand.  The Obama administration should pull the trigger on that 9 mm.  Label them a “currency manipulator.”  Then hit them with tariffs, steep enough to restore a balance of trade.  If they complain, then remind them that, by all rights, we should hit them with even steeper tariffs and run a trade surplus until we’ve recovered the $2 trillion that they’ve drained from our economy in the last decade.

This is the first time that China has shown even a hint of humility in its relationship with the U.S. since it dictated to the Bush administration how many “very”s should precede the word “sorry” in Colin Powell’s apology for the American reconnaissance plane that supposedly wandered over their air space.  It’s a sign of just how terrified they are of losing even a little of their U.S. market share.  And it’s a sign to the Obama administration that they have nothing to fear from China’s hollow threats.

Time to Label China a Currency Manipulator

March 16, 2010


The U.S. Treasury Department is due to report to Congress by April 15th on whether or not it considers China to be a “currency manipulator.”  (See the above-linked Reuters article.)  Such a determination could be tantamount to an economic declaration of war.  Under World Trade Organization rules, a nation who determines that another is manipulating the exchange rate is then free to impose tariffs to rectify the situation.  Such a move by the U.S. to restore a balance of trade would threaten China with economic collapse. 

Nevertheless, the time has come.  With its policy of pegging the yuan to the dollar instead of allowing market forces to determine the exchange rate, China clearly is a currency manipulator.  Of course, so too is virtually every other nation, including Japan and the Euro zone.  The only difference is that they’re much more subtle about it, leaving their exchange rate to the whims of market forces, but then manipulating those market forces.  It’s not as effective as China’s policy, but they’re able to compensate for any erosion in exchange rate by using other tactics to maintain their trade surpluses with the U.S.  So the end result is the same with one exception.  It strips the U.S. of the ability to label them as currency manipulators. 

Will the Obama administration make such a move?  I doubt it.  They’ve yet to show any real backbone in international trade, failing to respond to huge, new Mexican tariffs on American exports or to blatant dumping by Japanese auto manufacturers.  However, as the economic stimulus plan winds down and as the Federal Reserve ends its programs to pump trillions of dollars into the economy, Obama faces the reality that it simply hasn’t worked.  Though they’ve been trumpeting the growth in GDP, they know very well that the effect is temporary and that the economy is likely to sink back into recession as the stimulus spending is exhausted.  And there’s no appetite for more deficit spending.  With credit dried up and without phony economic bubbles (the housing bubble being the most recent example) to create the illusion of prosperity, Obama knows that real improvement in the economy depends on a rebound in the manufacturing sector, which has had the life sucked out of it by the trade deficit. 

The jobs temporarily salvaged by the stimulus plan have only carried him so far, and its effects are waning.  So with a 2nd term now hinging on a restoration of private sector manufacturing jobs, we may yet see the administration grow a spine in international trade.  Why not label China a currency manipulator?  There’s really nothing to fear.  Will China dump its U.S. treasury holdings, which some fear may drive interest rates sky-high in the U.S.?  Perhaps, but the threat of higher interest rates is way over-blown.

  First of all, the rest of the world will see any move by the U.S. to restore a balance of trade as a huge boost to the U.S. economy, driving strong demand by other countries for U.S. treasuries.  Those sold by the Chinese will be quickly snapped up.  If anything, interest rates may even fall.  Secondly, in the past year, the Federal Reserve has purchased more U.S. treasuries than the total of Chinese holdings.  Whatever slack there might be in demand for the U.S. treasuries sold off by China can easily be made up by the Federal Reserve.   And finally, since China will still be dependent on exports to the U.S. to prop up their economy, they will still be left with a lot of dollars looking for a home.  What else can they do except use them to purchase treasuries?  I suppose they could also use them to buy oil, but then the oil exporters will have to purchase treasuries.  In the final analysis, the demand for U.S. treasuries will remain strong regardless of what China does. 

There is the possibility of an unintended consequence.  A move by the U.S. to restore a balance of trade with China may be perceived as such a positive for the U.S. economy and such a negative for China’s that, once unpegged from the dollar, the yuan may actually rise very little  or could even fall against the dollar.  Imagine the laughter and gloating that would be coming from China then!

I do find it a little awkward supporting the branding of China as a currency manipulator because exchange rates really aren’t the problem.  Currency exchange rates tend to stabilize not at a level that restores a balance of trade but at a level where unemployment equalizes, leaving a permanent trade imbalance between nations grossly disparate in population density.  When has a change in exchange rate ever reversed a trade imbalance?  Never.  Since the 1970s, the dollar has fallen by over 300% vs. the Japanese yen.  Yet, during that time, our trade deficit with Japan has actually exploded.  More recently, when the yuan was allowed by the Chinese to rise by 20% a couple of years ago, our trade deficit with China only grew worse.  And, as the dollar has fallen in the past year vs. the yen and euro, the prices for imports from those regions at the retail level have actually declined.  Japanese automakers have aggressively cut prices in spite of the falling dollar. 

The problem is that badly overpopuated nations will never let something so trivial as currency exchange rates erode their share of the U.S. market.  They know very well that their economies are utterly dependent on manufacturing for export and that subsidizing their manufacturers in order to maintain U.S. market share is a very, very small price to pay.

So, while there’s no hope that an end to the blatant currency manipulation by China can reverse our trade deficit, labeling China as a currency manipulator will place into our hands the one weapon that can – tariffs.  And, once successfully employed against China, resulting in an economic renaissance in the U.S., the advocates of unfettered free trade and protectionism bashers will be exposed as liars and fools.  And it will beg the question:  if it’s successful with China, why not Japan and Germany and Mexico and others?  How much sense would it make to remain a member of the World Trade Organization at all? 

So, in the end, we may owe a big thanks to China for their clumsiness with the currency issue if it turns out to be the first crack in America’s golden idol of free trade.  Perhaps this will be the first nudge in a turn away from the far left end and back toward a more centrist trade policy that makes sensible use of both free trade and protectionism as necessary to maintain a balance of trade.  I’m skeptical, but we’ll soon see.

Obama Outlines Strategy to Double Exports

March 11, 2010


No sooner did I click the “publish” button for my previous post when along comes this article (above link) about Obama’s plan for doubling exports.

President Barack Obama, anxious to spur growth and tackle high unemployment, Thursday laid out a plan for tougher enforcement of trade laws, government advocacy and credit assistance to double U.S. exports in five years.

Obama also prodded China to move to a “more market-oriented exchange rate,” which he said would make a big contribution to putting the global economy on a healthier path after the worst economic downturn in decades.

All of this focus on strengthening the yuan is a complete waste of time.  No trade deficit has ever been reversed by changes in exchange rates.  Ever.  That’s because exchange rates stabilize at a level where unemployment is equal, not at a rate where trade is balanced. 

“We have to rebuild our economy on a new, stronger, more balanced foundation for the future, a foundation that will advance the American people’s prosperity at home, and support American leadership in the world,” Obama said in prepared remarks at the U.S. Export-Import Bank’s annual conference.

That means the United States cannot “stand on the sidelines” as other countries are busy negotiating trade deals, said Obama, who first announced his goal of doubling exports in his State of the Union speech in January.

Uh oh.  Here comes more trade deals that begin with the U.S. showing good faith by opening our markets first.

High U.S. unemployment is fueling anxiety about trade and trade agreements, which many of the president’s fellow Democrats blame for million of manufacturing job losses. Obama recognized that concern, but said the U.S. economic future depended on producing more to export abroad.

Export?  To whom?  Whose needs for manufactured goods aren’t already being met by China, Germany, Japan, Korea or a host of others?  There’s no untapped markets out there. 

“There’s no question that as we compete in that global marketplace, we’ve got to look out for our workers. But to look out for our workers, we’ve got to compete in the global marketplace. Because it’s never been as important an opportunity for America,” he said. “Ninety-five percent of the world’s customers and the world’s fastest-growing markets are outside our borders.”

Right.  And those markets are smart enough to insist that American companies build their plants there instead of exporting.

But when the United States negotiates trade deals, it must aggressively enforce those agreements to make sure other countries honor the commitments they make, Obama said.

So we find an unfair issue, file a complaint with the World Trade Organization.  A year or so later, the WTO issues a preliminary finding, which is then challenged by the offending nation.  Two years later, the WTO issues a final ruling, perhaps authorizing retaliatory measures by the U.S.  By then, the offending nation has moved on to other practices that assure their surplus of trade.  And the process starts all over.  We’ve seen this played out hundreds of times over the past decades.  And where has it gotten us? 

We’re consistently played for fools in international trade.  Obviously, nothing is going to change under this administration.

Exports Fall in January

March 11, 2010


The U.S. Bureau of Economic Analysis released international trade results for the month of January this morning.  The trade deficit fell by approximately $2.3 billion, driven by a $0.9 billion decline in oil imports and a $2.4 billion decline in non-petroleum goods imports.  But the latter was offset by a $1.0 billion decline in non-petroleum goods exports.  Otherwise, there wasn’t much noteworthy in the report.  Just another blip in the steady growth in the trade deficit since bottoming out early in 2009. 

In January, President Obama set a goal of doubling exports in five years in an effort to breathe life back into the manufacturing sector of the economy, and I vowed to track his progress on this goal.  Although January is the starting point, the drop in exports is an ominous sign. 

The following is the chart I’ve started, showing imports and exports, as well as the trajectory that exports need to follow to meet Obama’s goal. 

Obamas Goal to Double Exports

It’s not that I’m hoping he’ll fail in this endeavor.  I’d love to see him succeed.  But I know that he can’t because exports are not within his control.  Exports are 100% dependent on orders from overseas customers.  Sure, he can enact policies to provide tax breaks to manufacturers, but that may improve their cost position by a percent or two.  In the meantime, foreign competitors will easily match those meager cost reductions and no progress will be made. 

The real goal is to reduce the trade deficit.  Obama thinks he can export his way out of it, pushing American-made products into a world glutted with manufacturing capacity.  He doesn’t understand the role of population density disparity in driving global trade imbalances.  As a result, the only way to have any meaningful impact on our trade deficit is by restricting imports. 

It’d be fun to track the failure of this initiative if it wasn’t such a drain on the economy and if it wasn’t economically killing average Americans. 

I’ll update this chart monthly.

Detroit Mayor’s Plan to Bulldoze and Consolidate

March 9, 2010


In Chapter 10 of Five Short Blasts I pondered a future with a declining population – declining as the result of a conscious effort to reduce the U.S. population (in an ethical manner over a long period of time) in order to improve our standard of living and quality of life.  What infrastructure should be supported and which should be eliminated?  I’m sure that such a vision struck a lot of people as crazy. 

It’s an idea that seems to be catching on.  Last year I commented on a plan in Flint, Michigan to do exactly that.  (See https://petemurphy.wordpress.com/2009/04/23/de-development-underway-in-flint-mi/)  Now comes a similar plan for the much larger city of Detroit.  (See the above-linked article.)

Have you ever wondered what will become of Detroit?

Well, Detroit’s mayor has an idea: Bulldoze it.

Mayor Dave Bing is apparently working on a radical plan that would bulldoze a quarter of the city — some of the most desolate areas — and return it to farmland, the way it was before the automobile. Any residents still there would be relocated to stronger neighborhoods.

Unfortunately, instead of being the result of a conscious effort to reduce the population, it’s the result of people fleeing the sky-high unemployment of the city (currently somewhere in the range of 30%).  Vast tracts of the city are abandoned.  It’s a blight on the city and a drain on its resources.  Mayor Bing is simply facing reality.

But what I find fascinating and encouraging is that the idea that smaller, less densely populated communities can still have viable economies is actually gaining accpetance among economists:

Kildee (treasurer of Genesee County, which includes Flint) told London’s Telegraph that we need to get over the American mindset that “big is good.”

“The obsession with growth is sadly a very American thing. Across the US, there’s an assumption that all development is good, that if communities are growing they are successful. If they’re shrinking, they’re failing,” he said.

When this talk of bulldozing cities resurfaced last summer, some people said there was no evidence that the government had such plans were in the works.

But with Detroit taking the idea seriously, one professor says it may be time that we dared to dream — in a way we’ve never dared before.

“Things that were unthinkable are now becoming thinkable,” James W. Hughes, dean of the School of Planning and Public Policy at Rutgers University, told the AP. “There is now a realization that past glories are never going to be recaptured. Some people probably don’t accept that but that is the reality,” he said.

What the professor forgets is that the “past glories” he speaks of occurred in a world that was much less densely populated and at a time when the U.S. enjoyed a trade surplus.  Perhaps this process of back-pedaling is exactly the route we need to travel to recapture those “past glories.”  We don’t need bigger and bigger cities and more and more growth.  Where has it all gotten us? 

It’s a fascinating time to be living in Michigan where one can watch the transition from failed theories about economic growth to a stable, sustainable, prosperous – and much less crowded – future.

February Employment Better Than Reported

March 5, 2010

The Bureau of Labor Statistics released the February employment report this morning, reporting that an additional 36,000 jobs were lost in February and the unemployment rate held steady at 9.7%.  (However, the broader measure of unemployment – U6 – which includes the underemployed, actually rose from 16.5% to 16.8%.)  Here’s a link to the report:  http://www.bls.gov/news.release/empsit.nr0.htm

But the news was actually much better than reported.  The employment level actually rose by 307,000 workers.  See the following spreadsheet – my own tracking of the unemployment level:

Unemployment Calculation

But, since the BLS is reporting that the civilian labor force grew by 342,000 jobs, the result is actually a loss of 36,000.  Throughout the recession, I’ve complained that the government has held the reported unemployment rate artificially low with the claim that people were leaving the labor force.  Now it seems that they’ve begun the process of emptying that cubby-hole of workers who gave up looking for work.  Had they done honest reporting of unemployment all along, they would now be reporting healthy job gains and declining unemployment. 

The stimulus spending has had its intended effect.  Unemployment is indeed coming down ever so slowly.  Consumer spending has ticked upward.  Manufacturing has shown some growth as inventories have been rebuilt.  There’s just one problem:  the stimulus spending has peaked and will dry up over the next year. 

To make matters worse, the Federal Reserve will end it’s $1.25 trillion program of buying mortgages this month.  And the housing and construction sector of the economy is as bad as ever.  Another wave of foreclosures is on the horizon.  And factories and stores can’t build inventory forever. 

The stimulus spending was essential to halt the implosion of the economy that began in the fall of 2008.  I’d have done it too if I was president.  But what hasn’t been done was to fix the real problem ailing the economy – our trade deficit.  Had the president done this, the first new factories built in the U.S. to replace the imports from China, Japan, Germany and Mexico would be coming on line at about the time that the stimulus spending was winding down.  But nothing of the sort was done.  The time that the stimulus program bought him has been squandered.

The financial crisis stripped our economy of the housing and construction bubble that sustained an illusion of prosperity through most of the past decade.  Nothing has taken its place.  We’re now even more dependent on deficit spending to prop up the economy at a time when, thankfully, few in Washington have any more stomach for it.  Sure, they just passed a measley $35 billion jobs bill, a token move to pacify the masses that will have virtually no effect.

Though it may still be a few months away, the second dip in the double dip recession is virtually a sure thing.  Another harbinger may be the fact that, although the employment level rose by 307,000 in February, that’s far below the rise of 541,000 in January. 

One final note:  though anaylysts have been blaming the weather for the loss of jobs in February, the BLS actually questions how much effect it had.  (Scroll to the bottom of their report.)  Also note their admission that all it takes to be counted as employed is the earning of one dollar during the reporting period.  Given such a low bar, it’s a wonder that anyone is counted as unemployed.

Finally, the following are charts of the data presented in the spreadsheet.  The last one is the scariest, and it represents only my “U3A” calculation of unemployment, not the broader measure of U6 which includes those underemployed and those that have supposedly given up looking for work.   

Unemployment Chart

Labor Force & Employment Level

Unemployed Americans